Help me understand PCP car finance (UK)
August 30, 2020 3:10 AM Subscribe
If I buy a car on a PCP deal, is the optional final payment the true cash value of the car?
I'm thinking of buying a new car on a PCP finance deal. Using one dealer's calculator, I can see that the monthly payments are lower over a 24 month term than the monthly payments on a 36 month term. The difference is that the optional final payment is obviously higher on the shorter contract.
As I understand it, the optional final payment is the expected value of the car at the end of the deal. At the end of a 24 month contract the final payment is £6000, compared to the 36 month contract where the final payment is £5000. My plan would be to trade the car in for another at the end of the contract so surely the higher final payment would be preferable. I have no plans of making the final payment but would like to use the value of the car as a deposit for the next one. Is that how it works?
If were to trade in the car for another on a new PCP contract, would the final payment value act as a deposit on the new car? That is, instead of paying £6000 to complete the purchase of car A, could I use the value of car A as a deposit for car B?
I'm thinking of buying a new car on a PCP finance deal. Using one dealer's calculator, I can see that the monthly payments are lower over a 24 month term than the monthly payments on a 36 month term. The difference is that the optional final payment is obviously higher on the shorter contract.
As I understand it, the optional final payment is the expected value of the car at the end of the deal. At the end of a 24 month contract the final payment is £6000, compared to the 36 month contract where the final payment is £5000. My plan would be to trade the car in for another at the end of the contract so surely the higher final payment would be preferable. I have no plans of making the final payment but would like to use the value of the car as a deposit for the next one. Is that how it works?
If were to trade in the car for another on a new PCP contract, would the final payment value act as a deposit on the new car? That is, instead of paying £6000 to complete the purchase of car A, could I use the value of car A as a deposit for car B?
So you can buy this car in two years time for £6k, or in three years term for £5k. Seems reasonable.
But if you don't make that final payment at the end of the deal, then you don't own a car, and you would have nothing to trade in. Without the final payment, it's essentially a rental over the PCP term.
Of course, you can roll one PCP over into another at the end of the term, and many dealers will try pretty hard to help you to do that, with or without a trade-in.
posted by rd45 at 4:27 AM on August 30, 2020
But if you don't make that final payment at the end of the deal, then you don't own a car, and you would have nothing to trade in. Without the final payment, it's essentially a rental over the PCP term.
Of course, you can roll one PCP over into another at the end of the term, and many dealers will try pretty hard to help you to do that, with or without a trade-in.
posted by rd45 at 4:27 AM on August 30, 2020
Response by poster: The amount you can use as the deposit will be the value of the car minus that £6000.
Yes, that makes more sense.
Of course, you can roll one PCP over into another at the end of the term, and many dealers will try pretty hard to help you to do that, with or without a trade-in.
So what happens if I want to roll into another at the end of the term? If I want the same model car, just a newer one, do I have to start over again -- put down another deposit, pay the same instalments, etc…? Would the dealer more likely want to push me into a PCP deal with the existing car?
posted by popcassady at 5:04 AM on August 30, 2020
Yes, that makes more sense.
Of course, you can roll one PCP over into another at the end of the term, and many dealers will try pretty hard to help you to do that, with or without a trade-in.
So what happens if I want to roll into another at the end of the term? If I want the same model car, just a newer one, do I have to start over again -- put down another deposit, pay the same instalments, etc…? Would the dealer more likely want to push me into a PCP deal with the existing car?
posted by popcassady at 5:04 AM on August 30, 2020
You don't own the car unless you pay that £6,000. So if you want to trade it in, you have to do the paperwork and pay them the £6,000, then trade it in. If you hand it back, you don't pay them anything, and you have to fund the deposit on your next car yourself.
The point for the dealer is to make it frictionless for them to roll you onto a new contract (i.e. to collect £300/month off you) and to have a good supply of 2 year old cars to sell on the used market.
posted by ambrosen at 6:19 AM on August 30, 2020
The point for the dealer is to make it frictionless for them to roll you onto a new contract (i.e. to collect £300/month off you) and to have a good supply of 2 year old cars to sell on the used market.
posted by ambrosen at 6:19 AM on August 30, 2020
The optional final 'balloon' payment also known as the guaranteed future value (GFV) is an estimated amount which could end up being greater than or less than the cars value in 3 years time.
In practice the balloon payment is almost always less than the car is worth, so for a balloon payment of £6000, the car may actually be worth £9000.
What tends to happen is that towards the end of the contract you will get an offer to roll it over onto another new car, so you hand the car back, you don't have to pay the £6000 and they use that extra £3000 in the cars true value to make a finance offer that seems too good to turn down.
This is a clever financial sleight of hand because they are using money you have already paid into the first car to offer you a discount on the next one.
PCP deals have proven remarkably effective in encouraging people to change their cars more regularly at a time when cars can last for much longer, and also they encourage brand loyalty - if you don't happen to have the money for that final payment it is very much harder to switch to a rival brand.
If you are planning to hand the car back (or trade it) then beware of excess mileage charges.
posted by Lanark at 7:52 AM on August 30, 2020 [1 favorite]
In practice the balloon payment is almost always less than the car is worth, so for a balloon payment of £6000, the car may actually be worth £9000.
What tends to happen is that towards the end of the contract you will get an offer to roll it over onto another new car, so you hand the car back, you don't have to pay the £6000 and they use that extra £3000 in the cars true value to make a finance offer that seems too good to turn down.
This is a clever financial sleight of hand because they are using money you have already paid into the first car to offer you a discount on the next one.
PCP deals have proven remarkably effective in encouraging people to change their cars more regularly at a time when cars can last for much longer, and also they encourage brand loyalty - if you don't happen to have the money for that final payment it is very much harder to switch to a rival brand.
If you are planning to hand the car back (or trade it) then beware of excess mileage charges.
posted by Lanark at 7:52 AM on August 30, 2020 [1 favorite]
Lanark & ambrosen explained it very well already - I'm just coming back in here to add another tip.
That tip is: always have more than one dealer on the go. When I took out a PCP deal last year, I used carwow to make contact with a bunch of dealers - it's easy to get multiple quotes, and it's surprising what kind of range they cover. I live in an affluent town that's a short distance outside a post-industrial city. The dealer in the city beat my local dealer by a considerable margin on price and service. It's a competitive, high-turnover market - you can use that to your advantage.
posted by rd45 at 8:39 AM on August 30, 2020
That tip is: always have more than one dealer on the go. When I took out a PCP deal last year, I used carwow to make contact with a bunch of dealers - it's easy to get multiple quotes, and it's surprising what kind of range they cover. I live in an affluent town that's a short distance outside a post-industrial city. The dealer in the city beat my local dealer by a considerable margin on price and service. It's a competitive, high-turnover market - you can use that to your advantage.
posted by rd45 at 8:39 AM on August 30, 2020
Response by poster: What happens if the car becomes damaged in some way? Surely the value of the car goes down? How does that work out?
posted by popcassady at 3:59 PM on August 30, 2020
posted by popcassady at 3:59 PM on August 30, 2020
if you're returning the car, you have an obligation to return it in good condition, subject to fair wear & tear - that's part of the PCP contract - there would be penalties if it's damaged, same as there are if you've done many more miles than your agreement included
if you're making the balloon payment, nobody really cares what condition it's in
obvs you can claim on your insurance for some kinds of damage
posted by rd45 at 8:37 AM on August 31, 2020
if you're making the balloon payment, nobody really cares what condition it's in
obvs you can claim on your insurance for some kinds of damage
posted by rd45 at 8:37 AM on August 31, 2020
We just turned back in a car under a US lease that seems similar. The car company (GM) had a brochure (available on line) that gave very specific details about what was considered "normal wear and tear" like no more than 4 dings (less than 2") per panel. Anything more is considered excess wear and tear and subject to charges. I don't know how they calculate the charges but I'm guessing it yield a profit for them.
posted by metahawk at 5:43 PM on August 31, 2020
posted by metahawk at 5:43 PM on August 31, 2020
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posted by gregjones at 3:59 AM on August 30, 2020